Mumbai corporation’s efforts to compensate for GST loss

Mumbai is the nation’s financial capital and the epicentre of commerce and entertainment. Mumbai is home to over 12 million people. The city also contributes about seven percent of India’s GDP and is arguably the richest corporation in Asia with a budget equal to that of small states like Goa and Manipur in India. This year the total budget outlay presented by the Municipal Corporation of Greater Mumbai (MCGM) was Rs 27,258 crore.

The city has a significant role in providing a healthy and happy life, protecting the vulnerable, empowering the weak, nurturing aspirations and dreams and building the future. As such, the city is required to perform a complex and large set of functions which include that of a regulator, service provider and creator of infrastructure assets. It is responsible for ensuring effective and efficient administration of these functions.

However, with the launch of the Goods and Services Tax (GST), the corporation has lost its primary source of revenue, the octroi. And although the state will be compensating the corporation on the loss of its primary revenue stream, it has raised several questions – How is the Corporation going to cope with the new arrangement? How is this reality going to impact the direction and composition of capital and expenditure? Will the juggle ensure that the budget still remains citizen-centric?

Given this context, Observer Research Foundation, Mumbai, invited Municipal Commissioner Ajoy Mehta to deliver a talk that answers the above questions, simplify the task of comprehending the Rs 27,000 crore MCGM budget 2018-19 presented by him and enumerate the principles that have guided the formulation of the budget and the rationale underpinning the provisions made in the budget. And how, he has proposed to divide municipal finances in the post-GST year to achieve a balance between funds and functions that typically characterise Urban Local Bodies (ULBs) in the country. The talk was organised on 9 March 2018. The Commissioner spoke on the theme “MCGM’s Budget 2018-19: Matching Finances and Functions Post GST”. The session was chaired by Dr Ramanath Jha, Distinguished Fellow, ORF Mumbai.

Broad categories

There are three broad categories into which the corporation’s functions can be classified: i) regulatory functions, ii) provision of services and iii) infrastructure development.

The regulatory functions, for example, include grant of permissions, issuance of licenses, inspections etc. The corporation is responsible for essential services such as water supply and sanitation, sewerage treatment and disposal, solid waste management, public transport, street lighting, and for other larger social services including provision of public health, education, etc. Infrastructure creation is the current thrust area of the MCGM. The ambitious coastal highway and sewage treatment plants are two of the key projects that have seen allocations under this category and are planned from the futuristic point of view.

Regulatory functions do not take up a large part of your budget since it only requires human resources but the other two have larger financial implications.

Till the implementation of the GST, octroi contributed around Rs 8,000 crore or 35 percent to the MCGM’s annual revenue share. The implementation of GST meant the abolition of octroi, MCGM’s primary and most critical revenue source, throwing up major challenges for the civic administration.

How would the MCGM make up for nearly 35 percent of its revenue which has been shut along with the abolition of octroi, especially since GST was collected by the Centre and the State.

Octroi is a buyout tax, that it increased with the increase in the prices of goods, without any need of raising the tax percentage. GST, on the other hand, was not directly linked with the prices of goods.

What is the guarantee that GST which was to be collected by the central and state government would come down to the corporation? And how would it come down in time to help the corporation keep up with its finances?

Octroi is a daily cash collection and cash flow is steadily needed to run the corporation. Would this cash flow continue? If not, would the corporation have to borrow money from banks?

To protect the interest of the MCGM, the government passed the Maharashtra Goods & Services (Compensation to Local Bodies) Act, 2017 that guarantees compensation for the loss of revenue following the abolition of octroi. The law ensured that the current financial year’s octroi collection would stay protected. It also assured that the state would pay the current amount of octroi with an eight percent compounded interest in perpetuity to the MCGM every year. The government also guaranteed such a perpetual arrangement by opening an escrow account to ensure seamless remittance of the promised compensation amount to the MCGM per annum. The MCGM was thus assured that the revenue resource was protected completely. This year the MCGM will receive about Rs 8,500 crore from the government as compensation towards its loss of revenue from octroi as mandated under this legislation.

Citing other sources of revenue in the MCGM budget, Mr Mehta pointed out that property tax, at Rs 5,200 crore, constituted 22 percent of revenue. However, there remained issues with the collection of this key tax due to pending litigations in the Bombay High Court as well as the fact that a very small amount of people end up paying it. The income from Building Proposals is around Rs 3,900, which has seen a steady drop since past couple of years because of the slowdown in the real estate industry of Mumbai.

The corporation has several deposits which forms eight percent of the revenue at Rs 1,900 crore, and charges for water supply and sewerage came next, at six percent at Rs 1,400 crore. The other 13 percent comes from a number of other smaller provisions.

Once the revenue is collected the corporation starts accounting for its expenditure. The first in line is the ‘must pay’ expenditure which includes salaries and pension, which at Rs 10,000 crore, gobbles up to 52 percent of the MCGM’s finances. These salaries are given to employees involved not only in administration, but everyone involved in delivering the city’s fundamental services in sanitation, education, health, the total workforce employed by the MCGM being about 1.25 lakh. This issue is sought to be dealt with the rationalisation of the civic government’s recruitment practices, especially in the areas of solid waste management and sewage disposal, where several services which currently require human intervention being replaced with mechanised processes and even by clubbing similar functions being currently handled by different staff under one position. Accordingly, from 2017 onward, the MCGM has taken up a huge HR exercise where it is cutting down on personnel like clerks and clubbing jobs of people like drivers and operators under a single post. Administrative expenses up to five percent and operation and maintenance (O&M) takes 22 percent of the annual civic expenditure.

From 2017, this is the second consecutive budget where the MCGM is pushing up its capital expenditure, which creates new assets and upgrades current ones. The Corporation views such infrastructure as ‘assets’ which will translate into increased productivity, improved quality of life, seamless access to economic opportunities, foundation for human and economic development in the long run. This year this amount is pegged at Rs 9,200 crore going into roads and bridges. Coastal highway, which is estimated to cost Rs 16,000 crore at the time of completion, has been given an initial outlay of Rs 1,500 crore and work is expected to start in April 2018. Two new water sources for Mumbai, Gaigai and Pinjal are being created for augmenting Mumbai’s water sources under capital creation, for which the budget has set aside Rs 16,210 crore.

The Corporation is committed to principles of efficiency and transparency in governance. Hence, the future will see the Corporation leverage technology and digitisation for this purpose – MCGM going on cloud technology, and buildings will be given UID numbers are few of the initiatives.

With the revenue pegged at Rs 24,000 crore, and expenditure estimated to be Rs 27,500 crore, it raises issues on how the deficit of Rs 3,500 crore is going to be taken care of?

The Corporation has decided to draw funds from the Corporation’s special reserves of Rs 69,000 crore in order to tackle this deficit. These are fixed deposits in various banks drawing an interest of 7.5 percent which are available to the corporation on zero-interest loans.

It is for the first time, that the MCGM looked at what the break-up of these reserves are. Rs 21,000 is kept aside as a fiduciary fund for Provident Fund and gratuity and deposits and bank guarantees. The rest of the Rs 48,000 crore has now been allocated over the infrastructure projects that need cash flows like the coastal highway, Goregaon-Mulund Link Road, Gargai-Pinjal water sources, hospital bed capacity up-gradation in suburban Mumbai, and Sewage Treatment Plants (STPs).

A salient feature of this budget is its integration with the Development Plan (DP). This will direct the short-term expenditure strategies towards the fulfillment of the long-term vision of progress and change articulated in the DP for which Rs 2,400 crore has been kept aside. This will connect the DP and the budget.

An important objective of the MCGM is to secure for all the citizens of Mumbai access to the best of health care for which Rs 2,600 crore has been allocated. The goal is to provide affordable quality specialty and super specialty medical services to the residents of the suburbs, who currently have to travel to the city for health care. Improving the quality of primary health care services is also on the agenda of the MCGM. The focus is on strengthening infrastructure and equipment and improving human resources in the primary healthcare sector. A budget has been set aside for an animal hospital and cemetery.

Education is the passport of the poor to a better life. The MCGM spends Rs 2,800 crore annually on education, yet about 35 schools shut down in 2017-18. This year will see the introduction of several measures by the Corporation in improving the quality of education across educational institutions run by it. Some such initiatives include improving the basic teaching standards, installation of CCTV cameras, nutritive supplementary meals, digital classrooms, e-libraries, repairs, up-gradation etc. The Corporation plans to set up new international public schools and bi-lingual public schools as well.

Solid waste management is another priority sector and there is a move towards segregating and processing garbage at source. 24 segregation centers, one in each ward is being created to decentralize the system.

The Corporation is committed to providing 100 percent connectivity to the sewerage systems and also intends to mechanise the process of cleaning and maintaining the sewerage network. Hence, the Corporation is set to invest heavily in the sewerage system in Mumbai. All human intervention in sewers will end and mechanized cleaning will be incorporated.

Gardens maintained by the Corporation will now have more green spaces, open playgrounds, cycling and walking tracks rather than stadiums and amphitheatres. No civil constructions will be allowed and all spaces should be open to sky. Funds have been earmarked for investment in equipment to upgrade fire brigade services, and women’s hostels.

The MCGM plans to scrap dilapidated ‘Pay and Use’ toilets and construct new modern and up-graded toilet facilities. The Corporation will appoint an entity to operate and maintain the newly constructed toilets. There will be no charge for use of these toilets. The existing, well-maintained contractor run toilets will stay.

Richest civic body, but ranks below many other cities

The event ended with the concluding remarks made by Dr Ramanath Jha. Dr Jha underscored the fact that while Mumbai is arguably the richest civic body in the country, it also performs the largest number of municipal functions when compared with the civic bodies of other cities in India. Hence, in terms of availability of funds per capita per function, Mumbai ranks lower than many other cities, for example, Surat.

Dr Jha also presented an alternative argument to emphasise the financial constraints confronting the MCGM. If the total allocation of MCGM budget of Rs 27,000 crores is divided by the total population of Mumbai, fund allocation per capita per annum amounts to Rs. 22,000. When further disaggregated, it implies Rs 1,800 per capita per month and Rs 60 per capita per day for performing all functions, he pointed out.

Dr Jha made recommendations on the broader issue of how to match finances with functions in the context of municipal bodies. He pointed out that in no other country in the world, whether developed or developing, are the ULBs as financially malnourished as in India. In the United States, out of the total government revenue, about 15 percent goes to the cities; this percentage being about eight percent in Brazil, 6.5 percent in Brazil, seven percent in South Africa and a measly 0.75 percent in India.

The launch of the Goods and Services Tax (GST) has further weakened the financial health of the municipal bodies in India. The only sizeable source of tax revenue that has remained with these bodies post GST is the property tax. In the case of the MCGM, property tax accounts for about 22 percent of its revenue, a figure that is comparable with other nations of the world. Furthermore, when the share of other sources of revenue such as fees, user charges, penalties etc. are added to the revenue from property tax, the resulting total can finance only 50 percent of the total expenditure incurred by municipal corporations to perform its functions, a fact that is true of all corporations across India.

This implies that no city can, independently and in its own capacity, manage to generate more than 50 percent of its revenue requirements. This is further entailed by the fact that about 50 percent of functions constitute what can be referred to as “unfunded mandate”­­­­­- functions which are mandated but are not financed. This financial limitation is reflected in the poor performance of municipal bodies. Given the trend of rapid urban expansion and development, which will only get stronger over time, this problem will inevitably intensify. Hence, there is a need to seriously consider adequate revenue sharing between the centre and the states on the one hand and the cities on the other.

The 74th amendment to the Indian Constitution instituted the State Finance Commissions (SFCs) which were entrusted with the task of identifying the functions that are to be performed by the municipal corporations and mapping the financial requirements to do so, to eventually articulate a mechanism by which the centre and the states would devolve funds to the city corporations. This initiative has not been able to improve the financial reality of urban local bodies.

The new Land Acquisition Act referred to as the Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013 requires the Municipal Corporation to paying twice the ready reckoner rate for land acquisition. If the MCGM were to acquire land that been earmarked for acquisition in the Development Plan 2034, it would not be able to do so even after dedicating an amount equal to the revenue of the Corporation aggregated over 20 years.

Dr Jha emphasised the need to make citizens aware of the challenges faced by the municipal corporations so that they can do their bit in pressurising the centre and the state governments to act on relieving the financial woes of their civic counterparts.

Formulation of the resource sharing mechanism between the centre and the states, on the one hand, and the civic bodies, on the other, will take time. Hence, cities will need to identify alternative financial solutions, for example, plugging loopholes, financial partnerships, land resources and drawing upon reserves etc. for the immediate future.